A New Era for Manufacturing in China

China’s emergence as a manufacturing powerhouse has been astonishing. In seventh place, trailing Italy, as recently as 1980, China not only overtook the United States in 2011 to become the world’s largest producer of manufactured goods but also used its huge manufacturing engine to boost living standards by doubling the country’s GDP per capita over the last decade. That achievement took the industrializing United Kingdom 150 years.

Today, however, China faces new challenges as economic growth slows, wages and other factor costs rise, value chains become more complex, and consumers grow more sophisticated and demanding. Moreover, these pressures are rising against the backdrop of a more fundamental macroeconomic reality: the almost inevitable decline in the relative role of manufacturing in China as it gets richer. Manufacturing growth is slowing more quickly than aggregate economic growth, for example, and evidence suggests that the country is already losing some new factory investments to lower-cost locations, such as Vietnam, sparking concern about China’s manufacturing competitiveness.

Competitiveness, of course, is a broad term that can confuse more than clarify. During the 1980s, for example, there was much hand-wringing in the United States about declining manufacturing competitiveness versus Japan. In the following decade, however, those concerns faded, replaced by a focus on the failings of “Japan Inc.,” the SUV-fueled resurgence of the US automotive sector, and the boom in US high-tech manufacturing. In the United States then, as in China today, there isn’t just one manufacturing sector; there are many, each with different competitive strengths and weaknesses.